Although economic data was mixed last week, equities pushed higher as markets seemed to focus more on the positive services data versus the weaker narrative seen in some manufacturing data: including undershooting PMIs and most notably abysmal factory orders out of Germany (although China’s manufacturing PMI was stronger on the back of stimulus measures). Both the S&P 500 and MSCI World indices were up 2% last week; meanwhile cyclicals, financials and technology outperformed defensives and US 10-year Treasuries sold off 9 basis points to yields of 2.5%. Once again, the US-China trade deal was said to be getting “closer and closer” according to the Director of the US National Economic Council, Larry Kudlow, and it does finally feel like this turtle facing headwinds is nearing a finishing line: at least with stage one of the negotiations expected to be signed-off by June.
Meanwhile, the latest deadline for Brexit talks is fast approaching with the EU Summit beginning this Tuesday; but negotiations still seem far-off, especially in contrast to the compromises being reached in US-China trade negotiations. Last week Prime Minister May finally accepted that the division in her Conservative Party was too deep to ever reach a Brexit agreement and thus had to reach across the House to beseech Labour for a compromise. Although, over the weekend it seems that there is still considerable distance between their respective tolerable outcomes. And although many in both camps, across Parliament and the UK, feel like prisoners – deadlines now seem ever more easily redrawn: with a good chance the economy could still escape alive (though May’s tenure as PM is shot). Yet an extension remains at the mercy of 27 frustrated other EU nations while there is no clear majority for a revocation in Parliament. But at least last week marked a change of approach and this week will undoubtedly bring further needed clarity to the future of Brexit.
In other less repetitive arenas of the world economy, Turkish equities rebounded after the European Bank for Reconstruction and Development (EBRD) announced that they were ready to support the banking sector. This seemed enough to quell recent concerns following the election upset and unsustainable level of capital controls, but the country’s structural problems remain. Brent Crude Oil touched back above 70 dollars a barrel last week as tension in Libya added to the ongoing constrained output from Iran and Venezuela as well as Saudi production hitting a low - helping OPEC production down to 30.38 million boe per day. Meanwhile Saudi Aramco bond $10bn bond issuance is set for the week ahead with demand expectations north of $30bn.
The week closed with US nonfarm payrolls coming in at 196k, just a little higher than market expectations of 177k. However, average hourly earnings were up only +0.1% month on month and +3.2% year on year when the market was looking 2 tenths higher in both. The unemployment rate was stable at 3.8% and the participation rate was also 2 tenths lower at 63.0% from 63.2% expected.
The week ahead, along with it being the start of the Q1 earnings season, begins with US factory orders and durable goods on Monday. Focus on Tuesday will be the EU summit with US CPI, Japan PPI and UK trade balance on Wednesday. China CPI, PPI and FDI data are out on Thursday and Eurozone and China trade balance data are released on Friday.